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Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market

Author

Listed:
  • Hiroshi Konno

    (Institute of Human and Social Sciences, Tokyo Institute of Technology, Tokyo, Japan)

  • Hiroaki Yamazaki

    (Department of Social Engineering, Tokyo Institute of Technology, Tokyo, Japan)

Abstract

The purpose of this paper is to demonstrate that a portfolio optimization model using the L 1 risk (mean absolute deviation risk) function can remove most of the difficulties associated with the classical Markowitz's model while maintaining its advantages over equilibrium models. In particular, the L 1 risk model leads to a linear program instead of a quadratic program, so that a large-scale optimization problem consisting of more than 1,000 stocks may be solved on a real time basis. Numerical experiments using the historical data of NIKKEI 225 stocks show that the L 1 risk model generates a portfolio quite similar to that of the Markowitz's model within a fraction of time required to solve the latter.

Suggested Citation

  • Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
  • Handle: RePEc:inm:ormnsc:v:37:y:1991:i:5:p:519-531
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    File URL: http://dx.doi.org/10.1287/mnsc.37.5.519
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    References listed on IDEAS

    as
    1. Leech, Dennis, 1985. "Ownership Concentration and the Theory of the Firm : A Simple-Game-Theoretic Approach to Applied US Corporations in the 1930's," The Warwick Economics Research Paper Series (TWERPS) 262, University of Warwick, Department of Economics.
    2. Guillermo Owen, 1972. "Multilinear Extensions of Games," Management Science, INFORMS, vol. 18(5-Part-2), pages 64-79, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    portfolio optimization; L1 risk function; linear programming; Markowitz's model; single-factor model;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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